Question

0. Your friend and colleague has been working for about a year since graduating from university. He has come to you for advice on his saving and spending habits. You have accumulated the following information on his savings and spending that has occurred over the past year:

Saving/Spending	Amount $
Salary received over the last year, net of income tax	45,000
Rent and utilities paid	16,600
Car expenses paid	4,800
Credit card debt at the start of the year	1,000
Food, entertaining, recreation paid	6,000
Credit card debt at the end of the year	2,500
Line of credit at the start of the year	2,500
Line of credit at the end of the year	1,200
Purchase of car	20,000
Car loan at the end of the year	15,000
Cash account balance at the beginning of the year	500
Cash received from disposal of motorcycle	1,000
Cash received from disposal of computer	100
Cash account balance at the end of the year	1,000
Purchase of Investments	5,500
Student loan at the beginning of the year	15,000
Student loan at the end of the year	10,000
Purchase of new computer	1,500
Interest expense paid	1,400

Instructions

1. Prepare a statement of cash flow for your friend from information provided above using the direct method.

2. Can you provide some advice to your friend on how he could improve his cash flow strategies, such as managing debt levels and terms of payment?

Please ensure that your response is written in full sentences and that you provide an explanation and/or a calculation to support your answers.

Answer 1

(a)

Cash Flow Statement (Direct Method)
Particulars	Amount ($ )	Amount ($ )
Cash Flow from Operating Activities
Salary received over the last year, net of income tax	45,000.00
Rent and utilities paid	-16,600.00
Car expenses paid	-4,800.00
Food, entertaining, recreation paid	-6,000.00
(A) Net Cash Flow From Operating Activities		17,600.00
Cash Flow from Investing Activities
Proceeds from disposal of motor cycle	1,000.00
Cash received from disposal of computer	100.00
Purchase of Investments	-5,500.00
Purchase of car	-20,000.00
Purchase of new computer	-1,500.00
( B) Net Cash Used in Investing Activities		-25,900.00
Cash Flow from Financing Activities
Proceeds from car loan	15,000.00
Increase in credit card debt	1,500.00
Repayment of line of credit	-1,300.00
Repayment of student loan	-5,000.00
Interest expense paid	-1,400.00
( C ) Net Cash Flow from Financing Activities		8,800.00
Net Increse/ Decrese in Cash (A+B+C)		500.00
Add: Opening Balance of Cash and Cash Equivalents		500.00
Closing Balance of Cash and Cash Equivalents		1,000.00

(b)

Debt should be based on the regular income and expenditures.

You should negotiate with bankers to lower rate of interest.

Reduce your temptation to create more debt.

Try to increase your monthly payment.

Find ways to put more money towards your debt.

If required go through credit counselling.